FX Link: Convert Non-IMM Dated to IMM-Dated Forward
CME FX Link is a CME Globex-traded basis spread, traded as a differential, between FX futures and OTC spot FX. The spread results in a simultaneous execution of FX futures cleared by CME Clearing, and OTC spot FX, subject to OTC documentation and credit relationships.
In this example, a hedge fund is converting an FX forward from non-IMM-dated to IMM-dated.
Convert FX forward from non-IMM-dated to IMM-dated
On Monday, April 2, a hedge fund seeks to rebalance its FX forward book by converting its long non-IMM-dated GBP/USD, forward position to an IMM-dated basis.
The fund currently has a non-IMM-dated GBP/USD, forward that will expire Monday, April 9 for delivery Wednesday, April 11.
The fund, however, seeks to mitigate its exposure so that its current non-IMM-dated GBP/USD forward exposure expires on an IMM-dated basis on Monday, April 16 for delivery Wednesday, April 18.
The fund has two alternatives.
First, on April 9, the fund could sell a non-IMM-dated GBP/USD forward that will offset its existing long non-IMM-dated GBP/USD forward position and then buy a second IMM-dated GBP/USD forward that expires Monday, April 16 for delivery Wednesday, April 18.
Alternatively, on April 9, the fund could buy the April 2018 GBP/USD basis spread through FX Link.
This alternative strategy combines a long March GBP/USD futures position that expires Monday, April 16 for settlement Wednesday, April 18 with a short spot GBP/USD position on Monday, April 9 for delivery on Wednesday, April 11.
Either alternative will convert the fund’s long GBP/USD forward position from a non-IMM-dated to an IMM-dated basis that results in a risk positive, long position in GBP/USD.
Conclusion
We have reviewed one scenario where market participants could utilize FX Link to manage risk and positions across OTC FX spot and CME FX futures, seamlessly connecting the two markets. CME FX Link allows you to better manage and optimize margin and credit lines across CME FX futures and OTC spot FX transactions.
